Search results for capital appreciation bonds

Message to California High-Speed Rail Authority and California High-Speed Passenger Train Finance Committee: No 40-Year Bonds, No Capital Appreciation Bonds, What If You Lose Lawsuit?

March 18, 2013 is a big day for the People of California: the Day of Debt.

There will be two votes at two meetings three hours apart to authorize the sale of the bulk of the $9.95 billion Prop 1A bonds. (Several hundred million were approved in 2010 and 2012, FYI.)

At 11:00, the California High-Speed Rail Authority will meet to authorize borrowing $8.6 billion through the sale of bonds authorized by 52.7% of California voters in November 2008 as Proposition 1A. Here is the meeting agenda:

http://www.cahighspeedrail.ca.gov/WorkArea/DownloadAsset.aspx?id=2147483707

At 2:00, the California High-Speed Passenger Train Finance Committee will meet at the same location to authorize borrowing $8.6 billion through the sale of bonds authorized by 52.7% of California voters in November 2008 as Proposition 1A. Here is the meeting agenda:

http://www.treasurer.ca.gov/financial/2013/20130318/1a.pdf

At these meetings, I will ask for amendments to the resolutions to prohibit the sale of 40-year bonds (this maturity term is allowed in statute, by the way, see California Streets and Highways Code Section 2704.11(b)) and prohibit the sale of Capital Appreciation Bonds. I’m also going to ask about what happens if the state sells the bonds and then the Authority loses the lawsuit alleging its failure to conform to the terms of Proposition 1A.

I also sent this message electronically to the California High-Speed Rail Authority (boardmembers@hsr.ca.gov) and the California High-Speed Passenger Train Finance Committee:

Dear California High-Speed Rail Authority leadership:

At your Monday, March 18, 2013 meeting, you will consider a resolution as part of the procedure to direct the state to borrow $8.6 billion for high-speed rail by selling bonds authorized under Proposition 1A (2008) to investors:

4. Consideration of request to the High-Speed Passenger Train Finance Committee to approve resolutions under the Safe, Reliable High-Speed Passenger Train Bond Act for the 21st Century, authorizing the issuance of bonds and commercial paper notes as follows: Resolution IX, authorizing the issuance of State of California High-Speed Passenger Train Bonds or Commercial Paper Notes in the principal amount not to exceed $8,599,715,000. ($8.6 billion)

I am requesting you to add language to these resolutions that does the following:

1. Prohibit these bonds from being sold with 40-year terms of maturity.

2. Prohibit these bonds from being sold as Capital Appreciation Bonds.

Assembly Bill 3034, enacted in 2008, authorized sale of the Proposition 1A bonds as 40-year bonds. The bill analysis for the July 7, 2008 Senate Appropriations Committee indicated that the maturity extension from a 30-year to a 40-year term would increase interest payments and increase the overall cost at an estimated amount of $3,777,000,000 ($3.7 billion) in 2008 dollars, assuming 5 percent interest and 3 percent inflation. (Source: http://www.leginfo.ca.gov/pub/07-08/bill/asm/ab_3001-3050/ab_3034_cfa_20080707_114445_sen_comm.html)

These estimates were produced at a time when the official cost was estimated at $45 billion. Now the figure of $68 billion is being officially cited. Why add another $3.7 billion to the cost?

Also, in the Official Voter Information Guide for the November 2008 election, the Legislative Analyst’s Office stated this about the cost of the proposed Proposition 1A bond sales authorized under the Safe, Reliable High-Speed Passenger Train Bond Act:

The costs of these bonds would depend on interest rates in effect at the time they are sold and the time period over which they are repaid. While the measure allows for bonds to be issued with a repayment period of up to 40 years, the state’s current practice is to issue bonds with a repayment period of up to 30 years. If the bonds are sold at an average interest rate of 5 percent, and assuming a repayment period of 30 years, the General Fund cost would be about $19.4 billion to pay off both principal ($9.95 billion) and interest ($9.5 billion). The average repayment for principal and interest would be about $647 million per year. (Source: http://voterguide.sos.ca.gov/past/2008/general/analysis/prop1a-analysis.htm)

The voter guide leaves the voter to assume that the state would maintain the current practice of selling 30-year bonds. It does not even mention the cost of 40-year bonds!

Regarding the Capital Appreciation Bonds, you are surely aware of the controversy surrounding California’s school districts selling these bonds for construction rather than the traditional type of general obligation bond (current interest bond). Please don’t hide the cost of this project by delaying repayment to investors with costly bonds that accumulate compound interest.

This project will assess huge debt burdens on future generations of Californians. Please avoid schemes that hide the cost from this generation.

Finally, at your March 18, 2013 meeting, please address what would happen if the state sells the Proposition 1A bonds and then the California High-Speed Rail Authority loses the court case John Tos v. California High Speed Rail Authority (Case No: 34-2011-00113919) (aka “the Kings County lawsuit”) regarding conformity to the provisions of Proposition 1A. A hearing in this case is scheduled for May 31, 2013 in Sacramento County Superior Court.

Kevin Dayton
President and CEO
Labor Issues Solutions, LLC
www.laborissuessolutions.com

 

We’ll see if the California High-Speed Rail Authority and the California High-Speed Passenger Train Finance Committee can explain their plans for borrowing money through bond sales in a simple, transparent manner at their meetings in Sacramento on Monday, March 18, 2013.

Michigan Reporter Joel Thurtell Provides Background on How Michigan Banned Capital Appreciation Bonds

UPDATE: Joel Thurtell has now posted (on his web site Joel on the Road) the “big graphic” – a table associated with his 1993 exposé of Michigan school districts selling Capital Appreciation Bonds (CABs). The table lists the Michigan school districts that sold Capital Appreciation Bonds, the amount of bonds sold, the amount of interest to be paid to investors, the length of time from sale to maturity, and the interest as a percentage of the principal (the amount borrowed).

To give readers an understandable comparison, the table also provides the numbers for a conventional mortgage at 7% for various time periods. (Try it at 4% today.)

These amounts and percentages are peanuts compared to what California K-12 and community college districts are selling as Capital Appreciation Bonds. Notice the highest percentages of interest to principal in Michigan school districts were 575% and 406%. In California, the Poway Unified School District’s 2011 bond sales were at 935%.

The next step in the process to ban California educational districts from selling Capital Appreciation Bonds is for someone to re-create this chart for California and circulate it widely.


Joel Thurtell (web site Joel on the Road) is the now-retired Detroit Free Press reporter whose intensively-researched 1993 articles about Michigan school districts borrowing money by selling Capital Appreciation Bonds were the catalyst for a 1994 Michigan ban on Capital Appreciation Bonds. Now he is working to make sure California citizens aren’t victimized by the same scam.

Through his blog, Joel Thurtell was the first reporter to publicly expose how California’s K-12 school districts and community college districts have been selling Capital Appreciation Bonds as a way to borrow money for school construction. His attention to this obscure but extremely costly and disingenuous method of borrowing money has been acknowledged by various news stories throughout California (Community College Districts’ Bonds Inflate Taxpayers’ Repayments– Sacramento Bee – August 22, 2012; High Cost of School Bond Shocks Poway – San Diego Union-Tribune – August 17, 2012; Kudos to Michigan Journalist on the Poway Bond Story– Voice of San Diego – August 8, 2012; Joel Thurtell Shames Poway, CA Financing– Daily Markets – August 10, 2012; School Bonds Could Trigger Fiscal Shock – Financial Times via CNBC – August 9, 2012)

The Voice of San Diego web newspaper finally managed to grab the attention of the state’s political leaders and news media with an article on August 8, 2012: Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools – Voice of San Diego – August 6, 2012. I continue to believe that it was the Voice of San Diego’s simple pie chart of the Poway Unified School District’s bond repayments (designed by Keegan Kyle) that allowed this story to fly – give Mr. Kyle a Pulitzer.

I found out about Mr. Thurtell’s crusade to alert Californians to the Capital Appreciation Bond racket when his 1993 Detroit Free Press articles were referenced by Mt. Diablo Unified School District 2010 Measure C Citizens Bond Oversight Committee member Alicia Minyen at the California League of Bond Oversight Committees annual conference on May 9. I wrote about the presentation about Capital Appreciation Bonds at this conference in a couple of mid-May blog posts, which have received a consistent trickle of attention since then.

Now, with San Diego County Treasurer Dan McAllister promoting an outline of possible legislation to restrict the sale of Capital Appreciation Bonds in California, Joel Thurtell has posted Public Act 278, the 1994 law that banned Michigan school districts from selling Capital Appreciation Bonds. He indicates that the relevant sections are 380.1352a (Borrowing money and issuing bonds); 380.1351b (Appreciation or sale at discount); and 380.1352 (Borrowing or issuing bonds; contract for legal representation).

Joel Thurtell has also posted the text of most of his 1993 Detroit Free Press articles about Capital Appreciation Bond sales by Michigan school districts, although as of August 26, 2012 he was still preparing additional unpublished text from the first article, dated April 5, 1993, and related charts published in the newspaper.

This Michigan law banning the sale of Capital Appreciation Bonds was enacted shortly before major newspapers and most state legislative web sites began posting content electronically on the web. (For example, the Michigan and California legislative web sites post bills starting with the 1995 sessions.) Try to research any state or local public policy activity before 1995, and everything is a lot more difficult! Thank you to Joel Thurtell for taking the time to provide public access to how the people of Michigan handled the Capital Appreciation Bond sales in their school districts in the early 1990s.

Board of San Diego Unified School District Senses Voters May Reject $2.8 Billion Bond Measure (Proposition Z) Because of Board’s Past Use of Capital Appreciation Bonds

“Board of Education” is displayed on the outside of the board’s meeting room at San Diego Unified School District headquarters. Oversized portraits of board members have not been hung – yet.

The board of education of the San Diego Unified School District wants permission from voters on November 6, 2012 to borrow more money for school construction by selling another $2.8 billion worth of bonds to investors. (The $2.8 billion amount does not include interest payments and transaction fees.) The ballot measure is designated as Proposition Z.

In November 2008, 68.71% of voters in the school district approved the $2.1 billion Proposition S. This bond measure remains controversial because the newly elected pro-union majority subsequently voted 3-2 to require construction contractors to sign a Project Labor Agreement (PLA) with unions for projects of $1 million or more funded wholly or in part by Proposition S.

The current school board – now made up of five pro-union board members – recognized that the proposed Proposition Z bond measure would inevitably draw opposition because of the Project Labor Agreement on projects funded by Proposition S. They made a political calculation and voted on July 24, 2012 to apply the Project Labor Agreement to Proposition Z as well as Proposition S. This locked in the campaign support of the San Diego County Building and Construction Trades Council for a tough campaign. (Proposition Z is already opposed by the San Diego County Taxpayers Association.)

But now a new and unexpected campaign vulnerability looms for the San Diego Unified School District’s proposed $2.8 billion Proposition Z: the sale of Capital Appreciation Bonds.

One of the school districts bordering the San Diego Unified School District – the Poway Unified School District – is now getting national news attention because its board decided in 2011 to borrow $105,000,150 by selling Capital Appreciation Bonds. Taxpayers will need to pay investors $981,562,329 by 2052. See page 12 of the Poway Unified School District’s Proposition C Bond Building Fund Annual Audit Report, January 31, 2012.

The San Diego Unified School District was also in on the Capital Appreciation Bond racket, big-time.

For example, the San Diego Unified School District board of education voted on March 24, 2009 to authorize what became a sale of $131,157,580.95 in Capital Appreciation Bonds for Proposition S. To complicate matters, $73,168,837.40 of those bonds (but not the other $57,988,743.55) would convert to the more traditional current interest bonds in 2019. The interest on borrowing that $131 million would total $273,994,919.05 by 2033, with the interest backloaded to the end of the maturity period, of course. Based on this 2011 San Diego Unified School District annual audit report, it would be accurate to say that taxpayers are paying $405 million through 2033 to borrow $131 million in 2009 through the “2008 Series A” bond sales.

Perhaps the school board let this happen because it was preoccupied with negotiating the Project Labor Agreement to fulfill the demands of construction union lobbyists. Either that, or it just didn’t care about how the specifics of its bond sales would affect future taxpayers.

Even worse is the $163,869,784 that the San Diego Unified School District borrowed from investors through the “2008 Series C” bond sales. Interest on that $164 million will total $740,360,216 by the time the bonds mature in 2050. It would be accurate to say that taxpayers are paying $904 million through 2050 to borrow $164 million in 2010 through the “2008 Series C” bond sales.

That’s $1.3 billion to borrow $295 million. Not as bad as the Poway Unified School District, but it’s unlikely many voters in the district would have voted for Proposition S if they understood what it would truly cost taxpayers to borrow money for school construction.

And you can’t blame the voters. The people who approved Proposition S in November 2008 didn’t know that the district would sell Capital Appreciation Bonds, rather than the traditional “current interest bonds” for which interest is paid out twice a year to investors. (Actually, I’ll make a guess that most people who voted for Proposition S couldn’t explain a bond if they were asked – they just wanted to help the kids.)

Now the board of education for the San Diego Unified School District needs to neutralize the Capital Appreciation Bond issue before it sinks the proposed Proposition Z. The board president John Lee Evans has declared that the board will consider a resolution stating it will not sell any more Capital Appreciation Bonds.

SD Unified to Consider Bond Restrictions – San Diego Union-Tribune – August 23, 2012

City Schools Prez Pledges No Exotic Financing on New Bond – Voice of San Diego – August 23, 2012

San Diego County Treasurer Drafts Outline of Legislative Proposal to Restrict and Expose How California School Districts Sell Capital Appreciation Bonds

UPDATE:

Now posted on the County of San Diego Treasurer’s web site:

Information about San Diego County Treasurer Dan McAllister’s August 21, 2012 press conference and presentation materials about Capital Appreciation Bonds.

A YouTube video of San Diego County Treasurer Dan McAllister‘s August 21, 2012 press conference: SD County Treasurer Dan McAllister Calls for School Bond Reform

UPDATE 2: The San Diego Union-Tribune reports on Senator Mark Wyland‘s Senate Bill 1205, which was amended on March 28, 2012 to impose restrictions on the sale of Capital Appreciation Bonds by K-12 school and community college districts. Howard Jarvis Taxpayers Association official David Wolfe, who also serves on the Board of Directors of the California League of Bond Oversight Committees, is quoted in support of the bill. Senate Bill 1205 never had a hearing and never had a legislative analysis.

Lawmaker Sought to Stop Controversial Bond Financing – San Diego Union-Tribune – August 23, 2012


A little more than three months after the California League of Bond Oversight Committees (CalBOC) annual conference brought my attention to school districts and community college districts selling Capital Improvement Bonds (CABs) to borrow money for school construction, a prominent public official has proposed legislation to increase public awareness of the practice and rein it in.

Yesterday (August 21, 2012), San Diego County Treasurer Dan McAllister held a press conference to announce the outline of a legislative proposal to deal with Capital Appreciation Bonds. At the time of this writing, his office inexplicably does not have any information about the press conference or the proposal on its County of San Diego Treasurer web site, but the San Diego Union-Tribune posted his letter and proposal on its own web site. See them here:

Outline of the Proposed Capital Appreciation Bond Reform from the San Diego County Treasurer

Letter from the San Diego County Treasurer Explaining the Need for Capital Appreciation Bond Reform

As I wrote in my August 11, 2012 blog post (News Media Beginning to Pick Up on Story about California School Districts Selling Insidious “Capital Appreciation Bonds” – Dayton Public Policy Institute an Early Informant to California Taxpayers), the attraction of Capital Appreciation Bonds for California school districts and community college districts has been referenced in various specialty publications, including the CalBOC Newsletter, my own Dayton Public Policy Institute blog posts on Capital Appreciation Bonds, and originally in Joel Thurtell’s blog www.JoelontheRoad.com.

It was a set of articles earlier this month in the Voice of San Diego about the Poway Unified School District sale of Capital Appreciation Bonds that really brought the story to mainstream public attention. People get motivated when they are the direct victims! For proof that the school district borrowed $105,000,150 by selling Capital Appreciation Bonds and will need to pay investors $981,562,329 by 2052, see page 12 of the Poway Unified School District’s Proposition C Bond Building Fund Annual Audit Report, January 31, 2012.

I hope the California Association of County Treasurers and Tax Collectors can align with the California League of Bond Oversight Committees (CalBOC) and various state and regional taxpayers organizations such as the Howard Jarvis Taxpayers Association to enact bipartisan legislation in 2012 to restrict or ban the sale of Capital Appreciation Bonds by school districts and community college districts. My statement about Capital Appreciation Bonds:

School board members don’t care how much these Capital Appreciation Bonds cost after 30 or 40 years. By the time property owners are assessed with the staggering tax burden, the elected board members will be out of office and probably dead. They won’t be accountable for the consequences, but they’ll still have their names on rusty plaques next to the front doors of deteriorating schools.

Latest News Media Coverage of CAB Reform

School Bond Reform Gaining Support – San Diego Union-Tribune – August 22, 2012

Tax Collector Blasts Poway Unified Bonds, Calls for Reform – North County Times – August 22, 2012

County Treasurer Calls for Widespread School Bonds Reform – Voice of San Diego – August 22, 2012

Poway Unified Residents Fume Over Expensive Bond: School District Officials Explain, Defend Decision Behind $1 Billion Debt – San Diego Union-Tribune – August 21, 2012

Poway Bond is a Billion-Dollar Box-Office Bomb – San Diego Union-Tribune (columnist Logan Jenkins) – August 21, 2012

County Treasurer Calls for Widespread School Bonds Reform – Voice of San Diego – August 21, 2012

A Creative Borrowing Boom: VOSD Radio – Voice of San Diego – August 20, 2012

Tonight: Big School Board Meeting in Poway – Voice of San Diego – August 20, 2012

High Cost of School Bond Shocks Poway Unified: Repayment Under Financing Plan Will Be 9 Times the Principal – San Diego Union-Tribune – August 17, 2012

‘Wow, If True Then That Is Financial Suicide’: Comments on School Bonds – Voice of San Diego – August 10, 2012

Find High-Interest School Bonds in Your District: A Five-Step Guide – Voice of San Diego – August 8, 2012

A Creative Borrowing Boom: Poway Not Alone in High-Interest Financing – Voice of San Diego – August 7, 2012

Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools – Voice of San Diego – August 6, 2012

News Media Beginning to Pick Up on Story about California School Districts Selling Insidious “Capital Appreciation Bonds” – Dayton Public Policy Institute an Early Informant to California Taxpayers

Finally, the news media is discovering and reporting on how many California school districts are selling “Capital Appreciation Bonds” to investors, thus committing future generations of California property owners to staggering tax payments.

To summarize this obscure issue in two paragraphs, when California voters approve “bond measures” so that school districts or other government entities can borrow money for construction projects, voters are directing local governments to sell “General Obligation Bonds” to investors such as individuals, commercial banks, insurance companies, and money market funds. Investors make money through the interest paid by the municipal government during the time it borrows the money. “General Obligation Bonds” are backed by the “full faith and credit” of the government entities, meaning the investors are guaranteed to get the principal and interest on the investment.

Traditionally, school districts and other government entities have sold General Obligation Bonds that provide investors with a semi-annual interest payment throughout the term of the bond, with the principal returned to the investors when the bond matures. But a recent trend for California school districts is selling a different type of General Obligation Bond. These are called “Capital Appreciation Bonds” (CABs), also known as Zero-Coupon Bonds, in which interest is compounded over the life of the bond and then paid all at once with the principal to the investors when the bond matures. This means that the government entity can delay collecting property taxes and backload the tax burden to the later years of the term of the bond, which can be as long as 40 years. Compound interest (paying interest on the principal AND interest) can accumulate huge financial obligations over such a long time period.

A reporter for the Detroit Free Press newspaper named Joel Thurtell found this same racket going on at Michigan school districts in the early 1990s and wrote some comprehensive articles exposing it, starting with the April 5, 1993 story “Michigan Schools Load the Future With Debt.” His reporting was one of the catalysts leading to a provision in Michigan law prohibiting the sale of Capital Appreciation Bonds. It was added to a school finance bill on June 22, 1994 as an amendment offered by State Senator Joanne Emmons, and Governor John Engler subsequently signed the bill into law.

Now retired from the Detroit Free Press but continuing his journalism with a blog (Joel on the Road: Words Shot With a Loose Cannon), Mr. Thurtell discovered earlier this year that California school districts were now playing this game. The giveaway was an outrageous 2011 sale of Capital Appreciation Bonds by the Poway Unified School District (just north of San Diego) that allegedly will cost taxpayers a total of $981 million by 2051. That’s the price of borrowing $105 million in 2011!

As I say to Californians whenever I try to explain this:

School board members don’t care how much these Capital Appreciation Bonds cost after 30 or 40 years. By the time property owners are assessed with the staggering tax burden, the elected board members will be out of office and probably dead. They won’t be accountable for the consequences, but they’ll still have their names on rusty plaques next to the front doors of deteriorating schools.

I learned about Capital Appeciation Bonds at the California League of Bond Oversight Committees (CalBOC) annual conference on May 11, 2012. (I’m on the Board of Advisors for this group.) I was astonished at the lack of news coverage about this potentially disasterous practice for the state and posted an article about it that evening.

I was still thinking about the issue a few days later and wondering why so few Californians knew or cared. Looking through my notes from the conference, I saw that the feisty and determined Mt. Diablo Unified School District Measure C 2010 Citizens’ Bond Oversight Committee member Alicia Minyen (an unsung hero for fiscal responsibility in California) mentioned that a reporter in Michigan has exposed the racket there, which led to a state ban on school districts selling Capital Appreciation Bonds. Researching on the web, I identified the reporter and then found his blog. I discovered he had posted several articles in the previous two weeks on the threat of Capital Appreciation Bonds in California, starting on April 27, 2012:

Muni bomb ticks in California

Posted on April 27, 2012 by Joel

By Joel Thurtell I was sipping coffee and reflecting on the ignorance displayed for all the world to read in a New York Times article. It was January 9, 2009. The Times story claimed to offer “a rare glimpse into … Continue reading →

I posted a comment on his blog to let him know that a fiscally conservative policy consultant in California had noticed the issue and planned to spread the news. He then mentioned me in his blog:

See no evil: CABS and media

Posted on May 16, 2012 by Joel

By Joel Thurtell Thanks to Kevin Dayton of the Dayton Public Policy Institute for noticing my recent columns about the evils of Capital Appreciation Bonds. He covered the May 11, 2012 meeting of California’s League of Bond Oversight Committees annual … Continue reading →

Fast forward to August 2012, and people are giving as much attention to my May 2012 articles about Capital Appreciation Bonds (Please Read This, Even If You Think Municipal Bonds Are Really BORING: We’re Setting Up the Next Generation of Californians to Pay Staggering Property Taxes and Reporter Behind Michigan’s 1994 Prohibition of Capital Appreciation Bonds (CABs) Watches and Writes about the CAB Frenzy at California School Districts) as they are to my posted photo of the closest Chick-fil-A to San Francisco. The issue is now getting attention, perhaps in part because big urban school districts such as the Sacramento City Unified School District, the West Contra Costa Unified School District, and the San Diego Unified School District are asking voters on November 6, 2012 for approval to borrow hundreds of millions and even billions of dollars through bond sales to investors.

A big break for exposing the issue was a Voice of San Diego article on August 6, 2012:

Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools

After putting together a bond that will cost taxpayers almost 10 times what they borrowed, the Poway Unified School District has become California’s poster child for a form of exotic financing.

I suspect that a key element in the successful spread of this article was the brightly-colored pie chart that put the astonishing news into graphic form for people to understand.

The Voice of San Diego then provided a nifty guide on August 8, 2012 to other school districts selling Capital Appreciation Bonds:

Find High-Interest School Bonds in Your District: A Five-Step Guide

Want to find out if your local school district has borrowed money using expensive capital appreciation bonds? Follow our guide.

Regrettably, as other news media outlets picked up on the story and circulated it nationwide, Mr. Thurtell and the Voice of San Diego received some attention for their dispute over proper attribution of sources and credit for the story. I’ll let them speak for themselves on their web sites, but I am pleased to see this issue brought to the attention of the public as more California local governments and the State of California itself careen toward bankruptcy. (For example, see The Right Way, the Wrong Way, and the Poway of School Bond Financingwww.CalWatchdog.com – August 9, 2012)

Something has to be done now to protect today’s California children from oppressive taxes in 20-40 years when they start families, buy a house or other residential property, and own small businesses with property. (I’m assuming there will still be private property in California in 2052 – am I being too optimistic?) I want to see someone in the California State Legislature introduce a bill banning the sale of Capital Appreciation Bonds and limiting all General Obligation Bonds to a maximum time period of 30 years. It can be modeled on the law in Michigan.

Will any California state legislator dare to challenge the many special interests that regard school bonds as “chasing after money…live for today and don’t worry ’bout tomorrow, hey, hey, hey” (Use the chorus of this song as the theme music for the effort.)

Also, I thank Joel Thurtell for mentioning my early attention to this story in his blog:

Credit

Posted on August 9, 2012 by Joel

By Joel Thurtell I appreciate the article by Andrew Donohue in the Voice of San Diego acknowledging my work in uncovering and reporting about the Capital Appreciation Bond scandal in California. Donohue responded to my complaint that reporter Will Carless of the … Continue reading →

I’m in Michigan. The first California reporter to write about California’s Cab scam was Kevin Dayton, on May 11 and May 14.

Reporter Behind Michigan’s 1994 Prohibition of Capital Appreciation Bonds (CABs) Watches and Writes about the CAB Frenzy at California School Districts

Here is a follow-up to my May 11 post entitled Please Read This, Even If You Think Municipal Bonds Are Really BORING: We’re Setting Up the Next Generation of Californians to Pay Staggering Property Taxes.

A speaker at the California League of Bond Oversight Committees annual conference on May 11 mentioned that the State of Michigan banned Capital Appreciation Bonds (CABs) in the 1990s after a reporter for the Detroit Free Press named Joel Thurtell exposed the extent of the scheme to the public in his April 5, 1993 investigative article “Michigan Schools Load the Future With Debt.”

It turns out Mr. Thurtell has a personal blog called Joel on the Road, in which he has been tracking and opining on the excessive use of CABs in California, including the mind-boggling one at the Poway Unified School District in San Diego County. He has posted four articles about CAB abuses at California school districts in the past five days.

I wrote the following comment on his blog in response to CABs and Consequences:

Mr. Thurtell:

On Friday, May 11, I attended the annual conference of the California League of Bond Oversight Committees in Sacramento. The increasing use of Capital Appreciation Bonds (CABs) to fund construction in California school districts (and fund the funding of school construction) was extensively discussed. Your articles were briefly mentioned by one speaker as influential in banning CABs in Michigan. You may be the catalyst to get CABs banned in California before the next generation of property owners in this state is saddled with a huge burden for construction completed 30-40 years earlier, when the political culture in this state revolved around the principle of “spend now/let someone else pay later.” You need to do a speaking tour in California. I recommend contacting the California Association of County Treasurers and Tax Collectors, the California League of Bond Oversight Committees, and the Howard Jarvis Taxpayers Association.

For the SEVENTH Time in 15 Years, School Board of West Contra Costa Unified School District Asks Voters to Let Them Borrow Money by Selling Bonds

The city of Richmond, California (in the San Francisco Bay Area) is the type of place where the so-called “One Percent” is much malingned. Richmond is the most populous city in the United States to have a Green Party mayor, and the mayor welcomed Occupy protestors to the city. Voters in Richmond will have the chance on November 6 to enact the nation’s first city soda tax (along with voters in El Monte, California).

Richmond’s supposed unemployment rate went from about 7% in 2006 to 18.5% in January 2010. Unemployment has now improved to between 14% and 15%, but obviously economic circumstances have taken a grim toll on the people of Richmond.

ASKING FOR MORE MONEY – SEVENTH TIME IN FIFTEEN YEARS – IT’S NEVER ENOUGH

So now the elected school board of the West Contra Costa Unified School District – based in Richmond – is asking voters for the SEVENTH time to approve a measure that would allow the school district to borrow money from investors through bond sales. (The district also includes El Sobrante, Pinole, Hercules, El Cerrito, North Richmond, and Kensington.)

The amount to be borrowed this time is $360 million. That does NOT include interest payments and financial transaction fees.

The school board tells voters it’s “For the Children of West County.” Most voters aren’t exactly clear on what bonds are, but they sound like free money from the government to help the children.

Ordinary voters have generously agreed FIVE TIMES since 1998 to let the school board of the West Contra Costa Unified School District sell bonds to borrow money for construction. The total amount of the five approved bond sales is $1,270,000,000.00. Only once did voters in the West Contra Costa Unified School District not approve a bond measure – in a special election in 2003 in which two-third of voters were required to approve the measure, rather than the 55% customarily sought today by school districts and community college districts.

Here’s a chart of the five bond measures approved for the West Contra Costa Unified School District since 1998:

Amount

Date of Election

Measure

Opinion of WCCUSD Voters

$40,000,000.00

June 2, 1998 Measure E Approved by 76.0% of voters

$150,000,000.00

November 7, 2000 Measure M Approved by 77.5% of voters

$300,000,000.00

March 5, 2002 Measure D Approved by 71.8% of voters

$400,000,000.00

November 8, 2005 Measure J Approved by 56.9% of voters

$380,000,000.00

June 8, 2010 Measure D Approved by 62.6% of voters

But $1.27 BILLION is NOT the real amount taxpayers owe to investors who bought these school bonds.

According to a June 7, 2012 statement related to an upcoming sale of bonds issued by the West Contra Costa Unified School District, the district’s total annual debt service for these five sets of bond sales is $1.77 billion.

Taxpayers owe $1,774,072,000.12 because of interest payments to investors.

The $1.77 BILLION also includes fees for bond counsel, disclosure counsel, financial administration, escrow agents, rating agencies, printing, and insurance. Lots of people get a cut of the action.

Ironically, the West Contra Costa Unified School District is enriching the One Percent who buy these bonds. Commercial banks, insurance companies, mutual funds, and wealthy individuals buy these bonds, not to help the children, but to make money through the interest payments funded by taxpayers.

OF COURSE THE BOARD OF THE WEST CONTRA COSTA UNIFIED SCHOOL DISTRICT SOLD CAPITAL APPRECIATION BONDS

It’s frustrating to try to figure out what has been going on regarding bond sales in the West Contra Costa Unified School District, because reports and audits prepared for the district are inconsistent or fuzzy in some of the fundamental information.

Page 118 of the June 7, 2012 preliminary official statement for the sale of bonds by the West Contra Costra Unified School District contained the following useful information:

On August 11, 2004, the West Contra Costa Unified School District borrowed $28,746,812 by selling the Measure D Series 2002 C Capital Appreciation Bonds. The interest to be paid by 2036 will be $67,063,188, for a total burden to school district taxpayers of $95,810,000.

On October 19, 2005, the West Contra Costa Unified School District borrowed $95,250,422 by selling the Measure D Series 2002 D Capital Appreciation Bonds. The interest to be paid by 2036 will be $157,139,526, for a total burden to school district taxpayers of $252,389,998.

On August 12, 2009, the West Contra Costa Unified School District borrowed $28,746,812 by selling the Measure J Series 2009 C Capital Appreciation Bonds.

Board member Charles Ramsey, a longtime nemesis of the Merit Shop and statewide traveling salesman for union Project Labor Agreements, apparently knew that Capital Appreciation Bonds were unorthodox. According to the minutes of the April 28, 2010 West Contra Costa Unified School District board meeting, he asked several questions about bonds, including “an explanation of capital appreciation bonds and deferring of debt service…Mr. Ramsey continued by asking for a full understanding for the Board to know all aspects of capital appreciation bonds and other forms of bonds.” But true to form in ignoring his appeal of conscience to rely on common sense, Mr. Ramsey then made the motion to approve the bond sales, which were approved 5-0. There were no public comments.

OF COURSE THE BOARD OF THE WEST CONTRA COSTA UNIFIED SCHOOL DISTRICT REQUIRES CONSTRUCTION CONTRACTORS TO SIGN A PROJECT LABOR AGREEMENT WITH UNIONS

On May 3, 2000, the school board voted 5-0 to approve a policy that it will consider a Project Labor Agreement for each individual construction project of $1 million or more. (An administrative regulation for this policy was implemented on August 2, 2000.)

On December 6, 2000, the board voted 5-0 to approve its first Project Labor Agreement, for the construction of a middle school.

On July 11, 2002, the board voted 5-0 to amend its Project Labor Agreement to put the responsibility on the contractors (instead of the unions) to find local apprentices.

Charles Ramsey, a school board member for the West Contra Costa Unified School District, was secure enough in his position when he introduced the Project Labor Agreement to the school board on March 15, 2000 to acknowledge to the stunned Superintendent of Schools (who wasn’t provided any advance information on the item) that he had blindsided her:

I ramrodded and railroaded and I am proud to say that I did.

Somehow 200 union members managed to hear about the item and showed up at the meeting to support it.

Please Read This, Even If You Think Municipal Bonds Are Really BORING: We’re Setting Up the Next Generation of Californians to Pay Staggering Property Taxes

Today I attended the first annual conference of the California League of Bond Oversight Committees (CalBOC) in Sacramento.

Several speakers provided guidance on how to be an effective oversight committee for a school district and provided case studies of dysfunctional oversight committees. But for me, the most valuable part of the conference was learning that foolish bond sales to finance school construction today are leaving our children and grandchildren with a tremendous tax burden in 20 to 40 years.

Walking into the conference, I knew little about municipal bonds. Unlike many Californians, I had understood that taxpayers must pay back the principal on these bonds, must pay back significant interest payments to the investors who buy the bonds, and must pay fees for various professional services associated with selling the bonds. Bonds are not “free money.”

I will guess that even Californians who know that a bond creates a debt that needs to be paid back usually don’t consider that voters who approve a $100 million bond are usually assessing property owners with taxes of about $180 million (amount not adjusted for inflation) over the term of the bond, when interest payments and fees are included in the total debt.

Traditionally, school districts have sold typical “General Obligation Bonds,” in which investors buy bonds, receive regular interest payments, and then receive the principal at the end of the term of the bond. But the growing problem for future generations of Californians is that they will need to pay off more than 1200 “Capital Appreciation Bonds” (CABs) to fund school construction (or to fund the funding of school construction, in a few cases).

Capital Appreciation Bonds are sold at a price substantially less than the principal amount of the bond. Investors don’t receive interest payments regularly over the life of the bond, but instead get a single huge payment of the principal plus the accumulated compounded interest at the end of the term of the bond.

People tend to underestimate the power of compounded interest, in which interest is earned on the principal AND on the accumulated interest. One speaker claimed that Poway Unified School District (in San Diego County) sold 40-year Capital Appreciation Bonds that will cost taxpayers 2200% of the principal because of the compounded interest.

Elected school boards like Capital Appreciation Bonds because they defer payments on the principal and backload interest payments to the final years before maturity, therefore keeping the present tax rate for property owners under the maximum rate set in Proposition 39 as a condition to seek 55% voter approval for the bond (rather than two-thirds approval).

Evading higher property taxes helps school board members to stay in public office, of course. And the huge debt service payments resulting from the compounded interest in Capital Appreciation Bonds will start for taxpayers 30 to 40 years after the bonds are issued, at which time many of the voters who approved the bond measures will be dead, as well as the school board members who authorized the sale of Capital Appreciation Bonds so many years earlier.

Does this story seem far-fetched because you’ve never heard of it? I think ordinary citizens rarely hear about municipal bonds because the topic can be complicated and dry. It doesn’t sell newspapers and it doesn’t attract TV viewers. Perhaps my layman status will allow me in occasional blog posts over the next few weeks to clearly and effectively explain the long-term dangers of these Capital Appreciation Bonds.

News Coverage: California Voters Must Be Wary of More Borrowing Via Bond Sales for School and Community College Construction

In July 2015, the California Policy Center released a 361-page report For the Kids: California Voters Must Become Wary of Borrowing Billions More from Wealthy Investors for Educational Construction. (Links to individual sections are below.)

For the Kids - California Voters Must Become Wary of Borrowing Billions More from Wealthy Investors for Educational ConstructionAs of August 26, 2015, the report has received the following news media coverage:

Six California School Districts Will Ask Voters on November 3 to Borrow $1.2 Billion From Bond Investors – commentary by Kevin Dayton – Flash Report – August 17, 2015

Unions Seek Control of Recent California School Bond Measures – commentary by Kevin Dayton – Union Watch – August 11, 2015

School Bonds May Equal Taxpayer BondageVictorville Daily Press – August 8, 2015

California Schools Stick Taxpayers with $149 Billion in Bond Debt – Breitbart News – August 5, 2015

California is in Huge Debt Hole Because of School Bonds – KFBK News Radio 1530 AM/93.1 FM in Sacramento – August 4, 2015

“For the Kids” Borrowing Will Saddle Kids with Debt – opinion piece by Gloria Romero in Orange County Register – August 4, 2015

Tough Education Reform, not More Borrowing and Spending, is What Students Need – commentary by Ed Ring – Union Watch – August 4, 2015

Specter of School Bonds Is Haunting Californians – opinion piece by Ed Ring in Sacramento Bee – August 2, 2015

Statewide Report Criticizes Passage of School Bonds – lead story in California League of Bond Oversight Committees Review – July 29, 2015

Doing the Math, Bond Debt for California Schools May Not Pencil OutModesto Bee – July 28, 2015

First look: Poll finds support for testing — Pell grants for prisoners — Washington state chief: Put more dollars into education – Politico (Morning Education) – July 28, 2015

School Bond Proposal Stirs California DebateThe Bond Buyer – July 27, 2015

Report: Voters Better Start Learning How Construction Bonds WorkLA School Report – July 27, 2015

Deceptive Ballot Language for Solano College Bond Measure Not Unusual – opinion piece by Kevin Dayton in Vacaville Reporter – July 25, 2015

Statewide Report Criticizes Passage of School BondsFresno Bee – July 24, 2015 (reprinted as Report Criticizes Passage of School Bonds in California in Education Week – July 27, 2015)

Here are links to each section of the report:

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My Public Comments on Bond Finance for California High-Speed Rail Entered into Record for Pivotal Bond Validation Lawsuit

My March 15, 2013 written comments to the California High-Speed Passenger Train Finance Committee outlining several concerns about its plans for bond financing were the ONLY written comments submitted to the committee before its March 18, 2013 meeting, at which it authorized borrowing more than $8 billion for California High-Speed Rail through bond sales (a requirement under Proposition 1A).

In addition, I was one of four people to speak in person at the March 18, 2013 California High-Speed Passenger Train Finance Committee meeting at which committee members voted to authorize the bond sales.

My written and oral comments to the California High-Speed Passenger Train Finance Committee have been entered into the record for the validation lawsuit (High Speed Rail Authority et al. v. All Persons Interested et al. – Case No. 2013-00140689) filed on March 19, 2013 in Sacramento County Superior Court concerning the legal validity of the bond sales. My comments help to boost the case of the respondents (“All Persons Interested”) that the California High-Speed Passenger Train Finance Committee failed to fulfill its legal responsibilities under Proposition 1A before it authorized the bond sales.

My written comments are submitted to the court as Exhibit G (public comment letter to the HSPT Finance Board by Kevin Dayton, March 15 , 2013) in the August 19, 2013 declaration of Rita Wespi of Californians Advocating Responsible Rail Design (CARRD) based in Palo Alto. Her declaration states that “Based on a series of Public Records Act requests I submitted to the High-Speed Rail Authority and the High-Speed Passenger Train Finance Committee, it is my opinion that the Finance Committee voted to approve over eight billion dollars of state bonds with little more information than a resolution from the High Speed Rail Authority.”

The declaration goes on to state the following:

On March 25, 2013, I made a similar request of the HSPT Finance Committee for “copies of all reports, analyses and recommendations provided to the HSPT Finance Committee members.”

Mr. Mark Paxson, General Counsel for the Treasurer’s Office, replied that “other than the agendas, resolutions and minutes from the prior meeting that are due for approval, there are typically no other documents provided to Finance Committee members prior to their meetings.”

In his response, Mr. Paxson stated that, for the March 18 committee meeting, the HSPT Finance Committee received in total one public comment letter and a briefing memo from the Public Finance Division’s staff. The staff briefing memo simply reiterated the agenda.

The March 15, 2013 public comment letter requested the Finance Committee to add language to Resolutions IX and X which would a) prohibit 40-year terms of maturity, and b) prohibit the use of Capital Appreciation Bonds. The letter argued that without this language, the bond sales and resulting repayment schedule would deviate from what was described in the 2008 voter guide for Proposition 1A. To the best of my knowledge, this letter was not acknowledged or discussed by the Finance Committee.

The declaration is correct: the only indications that my public comment was received was a subsequent email dated March 20, 2013 from Timothy Aguirre in the State Treasurer’s office informing me that “The State Treasurer’s Office will be holding the High-Speed Passenger Train Finance Committee meeting on Friday, March 29, 2013 at 2:00 pm at STO Room 587. Please see the attached meeting agenda” and a March 25, 2013 email from a general mailbox for the State Treasurer’s Office stating “You have indicated you would like to be contacted on items relating to the High Speed Passenger Train Finance Committee. The resolutions to be taken up during the March 29th meeting have been posted to the State Treasurer’s website.  You can find the resolutions by following the web link provided below. http://www.treasurer.ca.gov/financial/meeting.asp.”

My comments in person at the California High-Speed Passenger Train Finance Committee meeting on March 18, 2013 were submitted as Exhibit A (transcript of the meeting) as part of an August 19, 2013 declaration of Kathy Hamilton of Menlo Park, who writes articles about California High-Speed Rail for the Examiner web site.

Kevin Dayton: Note: Tape was turned on a little late, missing his intro. Kevin is CEO of
Labor Issues Solutions.

“Will the bonds be sold separately or at the same time for state bonds for other purposes? What rate do you expect to sell them at? I heard the chairman say 6.25% but I’m going to guess that was probably made that number up out of his head. The bonds selling last week were between 3.5 and 3.8%, something like that. I’d like to hear more about what you think you will get out of this. How will the bonds be structured? Will we be selling capital appreciation bonds at all for this? If the lawsuit that is coming up in Kings County is lost by the High-Speed Rail Authority and you’ve sold bonds, what happens to the money? These are questions I think that regular Californian who voted for this want to know. [They want to know] a lot more about this. We need to know a lot more about this [because] it’s a lot of money for us especially when you consider the interest etc will be about $20 billion [interest on bond funds] total for the whole thing. Thank you.”

Carol Ferris breaks in: “I’d like to thank you for your comments. I would also like to say that the purpose of this is to hear public comment and certainly the committee members can then take your comment into consideration. It’s not a question and answer session at this time.”

As noted in Kathy Hamilton’s declaration about the California High-Speed Passenger Train Finance Committee, “There was no evidence presented, questions asked or witnesses called. There were no discussions that the approval of the High-Speed Rail resolution was necessary or desirable. There were no discussions at all…none of the appointed committee members were in attendance, and all were substitute representatives.”

In other words, it was a farce. My article California High-Speed Rail: One-Way Ticket to Debt in www.FlashReport.org on March 25, 2013 described my experience speaking at the March 18, 2013 meetings of the California High-Speed Rail Authority and the California High-Speed Passenger Train Finance Committee. Also related to this meeting are my March 15, 2013 post Message to California High-Speed Rail Authority and California High-Speed Passenger Train Finance Committee: No 40-Year Bonds, No Capital Appreciation Bonds, What If You Lose Lawsuit? and my March 30, 2013 post Reality of Crushing Public Debt from Bond Sales Eclipses the Fantasy Vision of California High-Speed Rail.

Additional Background on Bond Validation Lawsuits

Documents filed in California High-Speed Rail Bond Validation Lawsuit – on the web site of Transportation Solutions Defense and Education Fund (TRANSDEF)

Sacramento Judge Has a Full Plate of Rail LawsuitsFresno Bee – September 9, 2013

Legal Challenges Plague the California Rail Projectwww.Examiner.com, by Kathy Hamilton – September 8, 2013

Bullet Project Attempts Legal Maneuver to Limit Damage by Lawsuits – www.Examiner.com, by Kathy Hamilton – April 2, 2013

California’s High-Speed Rail Authority Sues Everybody, Invites You to Argue Case in CourtSan Jose Mercury-News – March 28, 2013